SEATTLE — Amazon’s acquisition of Whole Foods two years ago rocked the food industry. Now the company is making what could become a much more effective play for a trillion-dollar chunk of the economy with a new grocery store set to open next year in a former Toys R Us location in suburban Los Angeles.
Amazon’s new grocery concept — beginning with a single store in Woodland Hills, California, confirmed by the company on Monday — is poised to “turn the Whole Foods model inside out by going from the highest-priced retailer in the modern world to the lowest-priced for grocery food retail,” predicted longtime grocery and retail analyst Burt P. Flickinger III.
Flickinger helped lead due diligence for a rival would-be buyer of Whole Foods Market before Amazon bought that chain in 2017 for $13.7 billion, marking its biggest step so far into grocery sales and physical retail.
Amazon has secured more than 12 leases in the L.A. area, as well as in Chicago and Philadelphia, the Wall Street Journal reported last month.
An Amazon spokesperson did not comment on whether the Woodland Hills store is the first store in a bigger chain, but she did say the store will not be a Whole Foods Market, adding that the organic and natural foods chain continues to grow. Nor will it be an Amazon Go cashierless convenience store — 23 of which are open or announced in four cities — which uses sensors to tally shoppers’ purchases.
Job descriptions for the Woodland Hills store, first reported Monday by tech news site CNET, describe “Amazon’s first grocery store.”
A grocery workers union said the new initiative raises concerns about Amazon’s market power.
Flickinger, managing director of New York-based Strategic Resource Group, expects Amazon to open 10 to 12 grocery stores in 2020 before pursuing a regional and then national expansion in the early part of the next decade that could eventually surpass 1,000 stores.
By his firm’s estimates, Amazon’s share of the $1.4 trillion U.S. food retail business could grow from less than 2% now to as much as 10% by the end of the next decade, Flickinger said.
Amazon can scoop up locations vacated by bankrupt retailers such as Toys R Us and Kmart, which couldn’t compete in the age of online retail. Flickinger said scores of regional grocery chains, such as Bellingham-based Haggen, have also gone under in the last 15 years, leaving behind desirable locations.
“Amazon’s going to have unprecedented support from shopping-center owners to convert bankrupt supermarket sites,” he said.
Los Angeles building department records show a permit issued in May to the owner of the Woodland Hills shopping center for a $3 million remodel of the interior and exterior of a 34,149-square-foot former Toys R Us.
Even as it grows its physical store footprint, Amazon is pushing ahead with grocery delivery. It recently dropped the additional $15 a month it previously charged on top of its $119-a-year Prime subscription for groceries delivered from Amazon Fresh or Whole Foods.
But most Whole Foods stores lack adequate space on loading docks and customer service areas for assembling and distributing online grocery orders, Flickinger said. That’s one of several factors that keep prices at Whole Foods too high for mass market grocery shoppers. “Whole Foods operating costs were like a boa constrictor choking off the operating efficiency of every store,” he said.
By building a grocery chain of its own from scratch, Amazon can maximize the efficiency of its already world-leading supply chain to lower prices and meet the requirements of new food shopping models such as grocery delivery and online order pickup.
Substantial space and technology can be devoted in new stores to collecting online customer orders, he said. Meanwhile, Amazon’s competitors in the thin-margin grocery business are spending to retrofit existing stores — sometimes disrupting operations — to provide these services.
“The greatest opportunity for Amazon is to self-distribute refrigerated and frozen food, groceries and general merchandise through its own fulfillment centers to its own stores, and, across its product portfolio, undercut outside distribution costs,” Flickinger said.